United States District Court, S.D. California
October 17, 2005.
In re CHARLES DOUGLAS FREELAND, Debtor. CHARLES DOUGLAS FREELAND, Appellant,
APM PROFIT SHARING TRUST; PHILLIP G. LARSON, Trustee Appellees.
The opinion of the court was delivered by: JEFFREY MILLER, District Judge
ORDER VACATING ORDER GRANTING SUMMARY JUDGMENT AND REMANDING FOR
Appellant Freeland appeals the decision of the Bankruptcy Court
denying Freeland's cross-motion for summary judgment which argued
for dismissal on the grounds that Appellee APM Profit Sharing
Trust ("APM") had not timely filed its Complaint to Determine
Dischargeability of Certain Debt. Freeland also appeals the
Bankruptcy Court's decision granting APM motion for summary
judgment that precluded Freeland from from presenting evidence
that a debt of $150,000 was not a debt arising from fraud.
In September 1999, APM and Phillip Larson, trustee of APM,
filed a complaint for breach of contract and fraud against
Freeland. APM and Freeland settled these claims in a Confidential Settlement and Release Agreement the following February. Both
parties had counsel during the settlement negotiations and the
execution of the agreement. The settlement agreement provided for
a stipulated judgment of $300,000, $150,000 of which was
allocated to the breach of contract claim and $150,000 allocated
to the fraud claim.
Freeland filed for bankruptcy in February 2002. The case was
converted from Chapter 11 to one under Chapter 7 in August 2002.
At the time of conversion from Chapter 11 to Chapter 7, Freeland
discovered that Larson was listed at the wrong address. Freeland
amended his bankruptcy schedules to correct the address and
served the amended notice of bankruptcy on Larson on October 9,
2002. On the schedule Larson was listed as a creditor with a
claim for $200,000 based on a personal guaranty. The notice did
not mention APM, nor did it indicate that Larson was the trustee
for APM. Larson claims to have not received this notice and did
not realize that APM was a creditor in a bankruptcy proceeding
until December 2002. The deadline for filing a Complaint to
Determine Dischargeability of Certain Debt under Section
523(a)(2) expired November 8, 2002. Larson filed his complaint on
February 14, 2003.
Adequacy of Notice
Freeland moved to dismiss APM's Complaint to Determine
Dischargeability of Certain Debt on the grounds that it was not
timely filed pursuant to Federal Rule of Bankruptcy Procedure
4007. The Bankruptcy Court denied the motion, stating that the
notice to Larson did not satisfy procedural due process. Freeland
repeated his argument in a motion for summary judgment and was
denied on the same grounds. This Court reviews the legal
conclusions of the Bankruptcy Court de novo. See In re
Kirsh, 973 F.2d 1454, 1456 (9th Cir. 1992).
In In re Dewalt, the Ninth Circuit addressed the question of
how much notice was sufficient before a creditor should be
penalized for failure to act. 961 F.2d 848 (9th Cir. 1992). The
court held that seven days notice of the bar date for a creditor
to file a complaint was insufficient and the creditor could not
be penalized for failing to file a complaint or a motion for an
extension of time. The court reasoned:
[T]he 30-day notice provision of Rule 4007(c)
provides a guide to the minimum time within which it
is reasonable to expect a creditor to act at penalty
of default. Even 30 days notice may not be enough if
truly extraordinary circumstances are presented, as
when an unsophisticated creditor, not represented by
counsel, receives only the most sketchy notice that a
bankruptcy has been filed. On the other hand, a somewhat lesser
period may be sufficient where there is clear
evidence the creditor has enough advance knowledge of
the bar date to file the complaint or request an
extension and has purposefully chosen to lie in wait
rather than present its claim.
Id. at 851.
Here, the Bankruptcy Court did not make specific factual
findings as to why notice was inadequate, nor did the court cite
legal authority for its conclusion that the notice did not
satisfy procedural due process. It is suggested in the statement
of facts of the court's decision on the cross-motions for summary
judgment that the failure to indicate that Larson is a creditor
in his capacity as trustee of APM as well as the fact that
Larson's claim was listed as a "personal guaranty," render the
notice so vague as to be inadequate.
Freeland argues that any flaws in the actual notice are not
enough to render the notice flawed constitutionally. He argues
that under In re Gregory, the burden shifts to the creditor
once the creditor receives even vague notice that he is a
creditor in bankruptcy. See In re Gregory, 705 F.2d 1118 (9th
Cir. 1983). In Gregory, the court declared that "[w]hen the
holder of a large, unsecured claim . . . receives any notice from
the bankruptcy court that its debtor has initiated bankruptcy
proceedings, it is under constructive or inquiry notice that its
claim may be affected, and it ignores the proceedings to which
the notice refers at its peril." Id. at 1123; see also In re
Bucknum, 951 F.2d 204, 209 (9th Cir. 1991) (O'Scannlain, J.
concurring) (quoting Neeley v. Murchison, 815 F.2d 345, 347
(5th Cir. 1987) as stating "[section] 523(c) of the Code, which
Rule 4007 is designed to implement, places a heavy burden on the
creditor to protect his rights: a debt of the type presented here
is automatically discharged unless the creditor requests a
determination of dischargeability [in a timely fashion].").
However, a debt is not subject to automatic discharge if the
debtor fails to schedule the creditor and if the creditor had no
notice or actual knowledge of the proceeding in time to file a
complaint or motion for extension. 11 U.S.C. § 523(a)(3)(B).
The record from the Bankruptcy Court does not indicate whether
the court meant to deny Freeland's motion to dismiss under
Section 523(a)(3)(B). Although the court suggests that the
failure to list APM on the schedule contributes to the inadequacy
of the notice, the court did not make any findings with respect
to whether APM had notice or actual knowledge. APM has contended
that Larson never received notice of the bankruptcy and only
realized that there were pending proceedings after speaking with another creditor in December 2002.
Because this Court cannot determine the facts on which the
Bankruptcy Court relied in concluding that there was a lack of
procedural due process, this matter is remanded for further
Provisionally, the Court also notes that Freeland's argument
that the Bankruptcy Court improperly applied collateral estoppel
under Archer v. Warner, 538 U.S. 314 (2003), is not persuasive.
The settlement agreement clearly apportions $150,000 of the
settlement amount to the fraud claim. In this respect this case
is distinguishable from Archer. See Archer, 538 U.S. at 322
("[W]hat has not been established here . . . is that the
parties meant to resolve the issue of fraud or, more narrowly,
to resolve that issue for purposes of a later claim of
nondischargeability in bankrutcy."). The Court infers from this
apportionment that the parties intended to resolve the fraud
claim. The Bankruptcy Court, therefore, properly applied
collateral estoppel. See California State Automobile Assoc.
Inter-Insurance Bureau v. Superior Court, 50 Cal.3d 658, 664
(1990) ("A stipulated judgment may properly be given collateral
estoppel effect, at least when the parties manifest an intent to
be collaterally bound by its terms.").
The Court hereby VACATES the order of the Bankruptcy Court
granting summary judgment for APM and REMANDS the case for
factual findings on the adequacy of notice.*fn1
IT IS SO ORDERED.
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